Macroscope: RBI Monetary Policy Update Aug’20

RBI monetary poilcy

MPC Recap till date

RBI

MPC Reading – July 2020

What is the latest reading?

RBI

Growth & inflation outlook projection:

Growth: For the first half of the year, RBI expects GDP growth to be contraction zone and real GDP growth to be negative for the year 2020-21. This is on the back of negative consumer confidence in July, weak external demand, and contraction in global trade.

Inflation: Food inflation has been elevated since the pandemic outbreak. Headline inflation is expected to continue at elevate levels through Q2FY2020-21. Supply chain disruptions continue as re-clamping of lockdown in a fragmented manner continues to add pressure. Inflationary pressure also evident across segments.

Other Highlight:

Liquidity reported as essential for effective transmission of rate cuts. Incremental focus on liquidity support for financial markets, improved credit flow, digital payments and leveraging technology. Liquidity measures include INR 10KCr. Liquidity to NABARD & NHB, provisioning to allow stressed MSMEs to restructure debt, Gold loan LTV enhanced to 90% of value

Key takeaways:

As signs of revival defer and the pandemic is yet to taper significantly, the Central Bank may want to have enough rate headroom as dry powder and err on the side of caution. Improved statistics on containment efforts of the pandemic may nudge the Real GDP situation into the positive trajectory soon. RBI is being judicious with the use of monetary tools which seems like a good idea as world economies continue to stare into the fog.

 

Macroscope: Manufacturing PMI Update August 2020

PMI

What is Manufacturing Purchasing Manager’s Index (PMI)?

The Manufacturing PMI is a performance measurement of the manufacturing & services sector, derived from a 500 manufacturing companies’ survey. It aids in gauging business activity and confidence levels.

Its weighted components are as follows:

details PMI

It is calculated separately for the manufacturing and services sectors and then a composite index is constructed.

How to read the PMI data?

– >50 figures indicate an expansion of the manufacturing sector compared to the previous month.
– <50 indicates a contraction.
– =50 indicates no change

What does PMI data mean for Financial Markets?

It serves as an indicator of corporate earnings, thereby, influencing equity & debt investors, alike. It is also a good parameter to compare attractiveness of an economy vis-a-vis another competing economy.

PMI Reading – July 2020

What is the latest reading?

The PMI figure in July 2020 stands at 46, compared with 47.2 in June

PMI data

PMI

Virus cases still rising and even the lockdown across multiple states, which indicates that the long road back to normality for the manufacturing sector.

 

 

Motilal Oswal Multi Asset NFO – An All-Weather Investment Product

motilal nfo

In current market scenario, where investors are facing real dilemma of choosing the investment asset class.
Investors are unwilling to invest 100% in traditional instruments as they currently offer meager returns, averse to invest all in equity as it carries high risk; also, not going all hog on gold as they think that the rally for gold is over & not investing in debt instruments as the risk of credit default has gone up amid current environment.

Is there any product which can allow investor to invest in all the above asset classes with the changing market dynamics, high downside protection and which aims for reasonable returns?

Interestingly, playing to this opportunity, Motilal Oswal mutual fund is launching a New Fund Offer based around the asset diversification- “Motilal Oswal Multi Asset”. Quick look at the features – open-ended, Multi asset.

Asset Allocation of Motilal Oswal Multi Asset Fund is as follows:

1

Every asset class has its “season”, and an investor whose portfolio is dynamically aligned to shift into said asset class, is poised to win most. All asset classes have their designated role ranging from generating alpha to acting as hedge, thus helping portfolio to maximize diversification benefits.

The Asset class correlation matrix is as follows:

Different levels of correlation among different asset classes provide the portfolio with an effective hedge

The Result of having the right mix of asset classes, in the right proportion, has led to Multi-Asset as a MF category to outperform its peers across various time periods. Table below highlights category average performance of MF categories.

Investor Takeaways:

The fund deserves an allocation in your portfolio for those who desire marginally better & consistent returns without
taking higher risk and looking to make an entry into the prevailing uncertain market.

The fund is suitable for those who are having an average indicative horizon up to five years & more.

In case you wish to understand more about the opportunity or simply discuss the prospects of the funds, feel free to
connect with us and we would be glad to have a chat.

Fund Details

NFO details

Opportunity to invest in Public Sector Bonds – Edelweiss Bharat Bond NFO

Public sector bond NFO

Of late, there has been quite a flurry of new funds being launched by mutual funds – many of which are for the fund house to offer a new product category or to play a theme. While we are constantly on the lookout for not just interesting, but for funds that hold real promise in terms of potential to create investor wealth.

PSUs are known to have laid founding stones to economic success. Their access to capital,  regulatory clearances and domain expertise have been instrumental in strengthening the businesses.

Times like now, when the private sectors are hitting a slump (almost), and the economy is turning towards the government for aid, PSUs stand strong.

PSUs covered in the CPSE basket are typically backed by state/central government and offer very high-rated debt instruments. These score well from a safety-against-default parameter

Here is the NFOs which have piqued our interest & the fund name is “Edelweiss Bharat Bond FoF”.

About Edelweiss Bharat Bond FOF

The NFO is open from 14th July 2020 to 17th July 2020. The Fund will be launched with two different maturities i.e. Bharat Bond FOF – 2025 and Bharat Bond FOF – April 2031

Edelweiss Bharat Bond FOF will invest in Bharat Bond ETF which will then invest the money in a bond issued by Public Sector companies.

• Portfolio will be majorly focused on PSU bonds issued by CPSE, CPFI or statutory body dominated in India

• Portfolio will have a conservative rating of AAA and will mature within 12 months period preceding the maturity date of the index.

• Fund does not have any lock in. Investor can entry and exit at any time.

• Investor will get the indexation benefit if he stays invested for a horizon of more than 3 years.

Food for thought:

Earlier issue (December 2019) of Bharat bond FoF April 2030 has generated a return of 10.41% (Data as on 13th July 2020) since inception while Bharat bond FoF April 2023 has generated 7.73% (Data as on 13th July 2020) returns since inception- more than most of the traditional instruments available.

Bottomline:

Investors with a conservative to low-rated risk profile and an investment horizon equivalent to that of the issue may choose to invest in the fund. The fund is a good constituent to fit into the debt allocation basis asset allocation.

In case you wish to understand more about the opportunity or simply discuss the prospects of the funds, feel free to connect with us and we would be glad to have a chat.

Edelweiss Bharat Bond FOF fund details:

details of NFO

The Signal: The Week & More

the week & more

Roundup

Nifty

 

Key Events

  • PM dismisses lockdown rumours: 

PM Narendra Modi dismissed the rumours of lockdown reimposition, and infact urged states and union territories to get ready for Unlock 2.0.  

With economic indicators showing early signs of revival, cautious approach to open up the economy will further help boost business sentiments and help revive the economy.

  • 21 million jobs added in May: CMIE: 

The unemployment rate remained very high in May 2020, but labour market conditions have improved during the month. Announcements made by central government and several state governments indicate the lockdown could be lifted further in phases during June. 

With improving labour statistics on the horizon, we expect consumption recovery to be right around the block.

  • IAF on high alert, moves fighter jets to forward bases

India and China have held another round of military-level talks, following the fierce clash in the Galwan Valley in eastern Ladakh on Monday night. China has claimed sovereignty over the region, that India trashed as exaggerated and untenable.

Aggressive movements on both fronts could disrupt foreign investments in India. Foreign investments started picking up only last month since the onset of the pandemic. However, since Indian equities have already witnessed a flight of significant foreign capital, reactive downside seems capped.

  • RIL share price hits all-time high as firm becomes net-debt free 9 months ahead of deadline

RIL stock price has rallied 95 per cent in less than three months from its 52-week low of Rs 867.82, fuelled by 11 investment deals in nine weeks, which aided the Mukesh Ambani-led firm to raise Rs 115,693 crore by selling 24.70 per cent stake in Jio Platforms

The RIL fundraise has been a significant contributor to increased foreign  institutional/portfolio investments in India. Reliance Industries has the highest weightage in bellwether indices NIFTY50 and S&P BSE SENSEX – meaningful contribution to index uptick.

The Signal: The Fool’s Misbehaviour

The signal

“Investments are subject to market risk. Read all scheme related documents before investing”

Nothing represents investor ignorance better than the above statement. Let me fix it for you –

“Investments are subject to risks even beyond the market. Only reading scheme-related documents will not help you mitigate those risks.”

Writers love to talk about fancy-name-ratios and how it indicates risk. Journals and columns love to rave about risk indicators more than the risk. In fact, most do not even dare tread beyond diversification to mitigate risk. 

But, here’s the bomb – market risk is NOT the biggest risk. 

You know market risks exist. You invest with an understanding that this risk may materialise, and you can incur a loss. 

But what if there is a risk that you are completely unaware of? 

Or even worse – you are aware of the risk yet continue to be a helpless victim?

 

Behavioural risk is the most underrated risk!

Even the most intelligent investors succumb to behavioural risk – especially during volatile times like now. While behavioural risk is an expansive subject, here are the three most critical and common behavioural fallacies among investors.

#1: The Investor’s Ego

There’s a popular notion about the investor’s ego – the moment a person buys his first equity share, he/she contracts this behavioural virus known as the Investor’s Ego. Symptoms include being excessively confident about own’s own rationale, ignoring conflicting opinions and in extreme cases – a tendency to compare oneself with Warren Buffett (or the other way round).

Often, investors refuse to accept own decisions as wrong and continue with futile attempts to make good of the situation. The inability to see beyond one’s ego is a prime reason for fractured relationships & broken investments.

Most long-term equity investments started out as an intraday trade gone wrong!

#2: Paying Attention

Don’t get this wrong. Paying attention is important; paying attention selectively is lethal.

“South-Asian Paints’ market share in Mumbai goes up from 30% to 35%. The company’s WACC has increased to 18% in just three quarters. Analysts note, the stock price has been exhibiting a continuous increase in the beta and standard deviation over the three quarters.”

Now, just because the investor itches to act upon newfound knowledge, they log into their trading account. 

What do you think happens next? Is it a buy or sell? What would you do?

Hold onto that thought.

Most investors (academically & professionally unrelated to finance as a subject) read the above as – 

“Increase in market share… blah-blah … increase to 18% in just 3 quarters … blah-blah-blah … continuous increase … blah … three quarters”. 

Is this how you read it?

If yes, let us take a wild guess about your investment decision. 

Was it a “buy”?

Here’s how paying attention selectively can backfire. As humans we tend to retain only the things we understand and base our decisions on the information our memory retains. 

Here, it is simple to understand that the company’s market share has increased (which is a good thing) and then we read through some more mumbo-jumbo that talks about an increase – so we presume this is also a sign of progress.

Here’s where things go wrong, and this is how wrong investment decisions are made. 

For the curious, the other two increases were referring to an increase in cost and increase in risk (which is not a good thing!).

It is okay to pay attention selectively if that piece of information has no role in your investment decisions.

#3: The Itch

Drawing from the above illustration, the investor can still do well if he stops at paying attention selectively. The real problem begins when he acts on it. 

This itch to act upon newfound information is also popularly known as action bias.

“Charlie and I decided long ago that in an investment lifetime it’s just too hard to make hundreds of smart decisions. That judgement became even more compelling as Berkshire’s capital mushroomed and the universe of investments that could affect our results shrank dramatically. Therefore, we adopted a strategy that required our being smart – and not too smart at that – only a very few times. Indeed. We’ll now settle for one good idea a year.” 

– Warren Buffett

Investors need to find solace in the fact that not acting upon something is also a conscious action. While this may seem straightforward, most investors are vulnerable to this behavioural risk. If you are considering investing, switching or redeeming any of your capital market investments because of the current volatility – that’s a prime symptom of the itch

Do not be a fool. Do not misbehave.

Each time you feel like tweaking your portfolio, wash your hands for 20 seconds and utilise the time to think about this – 

A theory suggests that oxygen absorbed during respiration damages cells through oxidation which leads to aging and consequently death. In a way, the elixir of life is also the kiss of death. (Now you know why they recommend antioxidants in diets!)

Is it possible that your paranoia about financial security led you to making great investment decisions and the same paranoia will push you to overdo it and ruin the fort you built?

Finsight (15th June 2020 to 19th June 2020)

Finsight

Indian Equity Markets ended on a negative note for the week. Nifty 50 was down 1.7% and Sensex by 1.5% respectively.

Weekly Capsule

– US Fed sees interest rates staying near zero through 2022

The Federal Reserve kept interest rates near zero indicated that rate might stay as it is till 2022. Also, during the Fed meet US Fed Chairman Jerome Powell said that the US economy will shrink by 5% in the year 2020 but will see a growth only in FY 21.

– Telecom operator dues

The Supreme court has asked private telcos to provide for security and repayment of roadmap in an attempt to allow telcos to replay AGR dues over a 20 year period. And if telcos are not able to furnish those guarantees the apex court is likely to consider a shorter time frame which may not be good news for these players.

– Indian Economy to Bounce Back with Growth of 9.5% in Next Fiscal: Fitch

After a contraction in the current financial year, India’s economy is forecast to bounce back with a sharp growth rate of 9.5% next year provided it avoids further deterioration in financial sector health. It has forecasted a 5% contraction in the GDP in the ongoing financial year.

Nifty at glance 

Nifty

outlook of week

Outlook for next week:

We feel that the markets will tend to be volatile over the next week also. Investors are suggested to invest only in staggered manner. The important number to watchout for next week in Indian market would be India Vix which is currently at 30-32 levels. In upcoming week markets are expected to remain volatile and this vix levels to elevate.

Category Update: Arbitrage

Arbitrage MyWay

What’s happening in arbitrage funds?

Arbitrage funds spreads turned negative for the first time. A spread is the difference between the price of stock and the price of its futures contract. Arbitrage funds delivers returns from a positive arbitrage spread and gives negative whenever there is negative spread.

How future prices converge with the spot price

Spot price myway

 

What was the primary reason for such negative spread?

If you look at May end series, market-wide rollovers stand at 91% (vs. average rollovers of 86% seen in last 3 series). Stock future rollover stand at 94% (vs. average rollovers of 90% seen in last 3 series).
Due to this pressure from arbitrage players over short roll overs, spread across stocks dipped into negative zone from over 20bps. Even the large inflows in last two months and lower interest rates have also contributed to the dip.

How do we look at it?

Amid such environment we all know that the arbitrage fund may generate lower returns over the next couple of weeks, however one should not forget that the market volatility during the May 2020 helps funds managers capturing better arbitrage opportunities by churning the portfolio in between. Hence, the actual returns are better than the spread captured on expiry days. One should ideally invest in arbitrage funds with at least 3-6 month’s investment horizon for stable investment experience.

Key Takeaways:

Existing Investor: Nothing will change for existing investor, they should stay invested for a horizon of 3-6 months.

For new investor who has time horizon of 3-6 months can definitely look at arbitrage funds cause they may generate better yields compared to liquid funds on a post-tax basis.

We believe that in couple of weeks the situation should normalize.

eye of an investor MyWay

Pessimists sound smart; optimists make money”, who are you?

Who are you myway

Indian equities ended the week positive. Nifty and Sensex were up by 6.0% & 5.7%, respectively. Investors seem to have welcomed the Unlock 1.0 warmly.

The Unlock 1.0 seems to have achieved what most policy reforms couldn’t – the return of bulls residing abroad. Unlike recent times, the uptick was supported by foreign institutional investments. Markets witnessed an influx of ~INR 22,000 Cr. this week.

data

Key happenings of the week that went by

Forex reserves keep climbing

The RBI on Friday announced forex reserves in the country for the week ended on 29th May surged to its all-time high of ~$493 billion. One of the key drivers of the recently heightened forex reserves was the lower cost of oil, a major expense on the forex front.

The reserves which are the backbone of the country in uncertain times like these saw an increase of ~$3.4 billion
in the mentioned week.

IMD’s expects rainfall to be at 102% of its long period average compared to 100% earlier.

It has only added to cheer and markets responded positively to it.

Capture

Positive Corporate Earnings:

Britannia Net Profit increased 26% to Rs374.75 crore

Britannia Industries reported consolidated profit of INR. 374.75 Crore for March quarter, registering a 26.1 percent yoy growth driven by lower tax cost (down45percentYoY).

Aurobindo Pharma’s net increased 45% to INR. 850 crore in Q4FY20

Aurobindo Pharma consolidated net profit grew by 45.2 percent to INR 849.8 crore for the quarter. Diversified product basket helped company to maintain the growth momentum in core geographies like USA and Europe. Net Debt stood at US$359mn as against US$724 mn in Mar-2019.

SBI posted a Q4 net profit of INR.3, 581 crore

The profit was supported by one-time gain of INR. 2,731.34 crore from the stake sale in SBI Cards done during the quarter.

Life ahead – at least in the near term

Indian equities are currently playing catch-up and the sentiment is likely to percolate to stress sectors. Small and Midcaps are likely to witness buying interest. Markets witnessed buying from FPIs and DIIs on improved sentiments.
Hence, investors may deploy fresh funds at current levels keeping in mind appropriate diversification and individual risk-taking abilities. Going ahead, the flow of liquidity in the Indian markets will give hint of a possible long-term direction. The markets will focus on the US Fed interest rate decision, IIP for April and inflation data for May among few data point to be released next week.

Star Fund Categories

1W return

Mutual Fund news:
1. Mirae Asset Mutual Fund has launched Mirae Asset Arbitrage fund on 3rd June 2020 and the NFO will be
open till 12th June 2020.

Finsight (8th June to 12th June 2020)

Fisight

Indian markets ended on a positive note. Nifty and Sensex both were up by 6.0% and 5.7% respectively.

Weekly Capsule

– Domestic Markets Zoom as country prepares to reopen

Indian benchmark Indices surged by more than 5% for the second week running, mainly on the back of normalcy being reinstated after the biggest and strictest lockdown in the world was in place since March 25. The FIIs faith in India recovery story was seen for the second week running as they poured ~20,000 crore in the equity markets.

– President approves insolvency suspension

The president on Friday, gave his approval to the suspension of 3 sections under the Insolvency and Bankruptcy Code which will not take into account any debt defaults after 25th March, the day since national lockdown was announced. The moratorium period is currently 6 months with a further extension not more than one year awaited in the near future.

– Forex reserves keep climbing

The RBI on Friday announced forex reserves in the country for the week ended on 29th May surged to it’s all-time high of ~$493 billion. The reserves which are the backbone of the country in uncertain times like these saw an increase of ~$3.4 billion in the mentioned week. One of the key drivers of the recently heightened forex reserves was the lower cost of oil, a major expense on the forex front

Nifty at glance

nifty 1

Nifty 2

Mutual Fund news:

Mirae Asset Mutual Fund has launched Mirae Asset Arbitrage fund on 3rd June 2020 and the NFO will be open till 12th June 2020.

Outlook:

Going ahead, the flow of liquidity in the Indian markets will give hint of a possible long term direction. The markets will focus on the US Fed interest rate decision, IIP for April and inflation data for May among few data point to be released next week.